The word is out in Fray Bentos that Botnia, a Finnish timber giant, is hiring. Everyday, a line of job seekers can be found queuing patiently outside the company's recruitment office in the sleepy Uruguayan border town.

Emilio Frávela, 22, is one of the 5,153 local people who have been interviewed for work at Botnia's new pulp mill since construction started in April.

"Some say that it might contaminate the environment, but I don't know. I just hope to get a job," says Mr Frávela, who currently works as a secretary for a garage.

Fray Bentos, situated across the River Uruguay from neighbouring Argentina, has suffered a prolonged economic depression ever since its main employer - a British meat packing factory - closed its doors in 1979 after more than a century.

With a price tag of $1.1bn (£600m) and a projected output of 1 million tonnes of eucalyptus pulp per year, the mill is set to be one of the biggest in the world. It is also touted as the largest ever private investment in Uruguay, a country of 3.4m people and long siestas.

Two miles up river, the Spanish multinational Ence is planning a second gigantic mill. Work on the $600m plant is scheduled to begin in October.

Both mills have the full support of Uruguay's current president, Tabaré Vazquez, who became the country's first ever leftist leader last year. Uruguayan officials estimate that the two projects will boost forestry exports fivefold. Botnia's annual projected exports of $400m alone constitute 1.6% of the country's gross national product.

Yet environmental campaigners oppose what they see as the government's gung-ho support for the multinational pulp manufacturers. They fear that the plants will contaminate the River Uruguay, severely damaging fish stocks and dramatically reducing water quality. They also warn of serious air pollution, most obviously the eggy smell produced during the pulping process.

In an example of rare solidarity, Argentina's national and regional governments, facing a share of the pollution but none of the economic benefits, have sided with the protesters. In fact, Argentina is threatening to take international legal action against its neighbour if the projects go ahead without additional environmental guarantees.

At the centre of the controversy is the companies' proposed use of a bleaching process known as "elementary chlorine free" or ECF, which - despite the name - includes its fair share of chlorine.

"The mill in Fray Bentos will have a bleaching sequence which will minimise the use of chlorine dioxide. Also the mill will have an efficient biological effluent treatment plant," Mr Annala continues.

Extra safeguards cited by the company include monthly checks on water quality by scientists from Uruguay's national university and regular assessments by the government's forestry department.

Campaigners have heard similar promises before. A $700m pulp plant in Chile, for example, "voluntarily" closed in June after a regional environment commission insisted on tighter environment controls. Waste effluent from the supposedly cutting-edge mill owned by the Chilean company Celco in the city of Valdivia is widely blamed for the recent death or migration of hundreds of protected black-necked swans from a nearby nature sanctuary.

"Exactly what happened in Chile is going to happen here," argues local activist and Fray Bentos resident, Dr Julia Cócara. "This is a place of privilege. We need to plan our environment better."

Hers is a lone voice among Fray Bentos's 22,000 inhabitants, who have mostly been seduced by the prospect of up to 8,000 new jobs. The companies have been less vocal about the fact that, once the construction phase is finished, the mills will only require 300 employees each.

Yet the European investors stress knock-on employment effects in the forestry sector and other service areas. Botnia's Bruno Vaun, for example, explains how his company is already working with local timber producers to help it meet its future requirement of nearly 120,000 hectares of fast-growth eucalyptus trees.

Again, activist groups like the Montevideo-based World Rainforest Movement (WRM) remain sceptical. Not only will monoculture plantations reduce local biodiversity, WRM argues, but they also take up land that could otherwise be used by more labour-intensive industries, such as agriculture or cattle ranching.

Henrique Gallicchio, a sociologist employed by Botnia, is more sanguine: "There will be work, but not necessarily employment."

Maximising local employment, he states, will require Fray Bentos to dramatically improve its cultural, retail and business services. At present, it doesn't even have a cinema.

· Oliver Balch is a freelance journalist based in Argentina specialising in sustainable development